Analysis of Market Risk Factors for the Performance of Consumer Banking in Pakistan under Financial Crisis 2008

Abstract

Global financial crisis 2008 has severely impacted on banks and their risk profile. Huge losses were incurred due to volatile risk factors that have shaken the financial and economic system globally. However severity of these losses differs from one region to another region and from one country to another country. In Pakistan, consumer banking is the most affected banking business that has faced considerable losses during and after the financial crisis of 2008, because of the unexpected rise in the nonperforming loans. This study explores the market risk factors, especially volatile part that majorly impacted the performance of the consumer banking in Pakistan in the financial crisis of 2008. It is noticed through studying the literature review that in 2008, when the financial crisis started influencing the banking system in Pakistan, the State Bank of Pakistan (SBP) had substantially increased the interest rate to control the hyperinflation in the country. Literature also indicates that financial crisis of 2008 has also impacted the Foreign Direct Investment (FDI) and Gross Domestic Product (GDP) growth rate of Pakistan. These changes in the financial and economic system show the interconnectedness between these two systems. Unemployment rate is another relevant variable in this context. The aim of this study is to assess the significance of the market risk factors in the ranking order for the performance of the consumer banking in Pakistan, which was identified from the literature review viz. Foreign Direct Investment, GDP Growth Rate, Inflation Rate and Interest Rate Volatility. In our study opinions of the banking professionals about the significance of the market risk factors were obtained through close-end questionnaire with 5 points likert scale for the study. Judgemental sampling was used in order to include experienced and seasoned consumer bankers.  Professionals were selected from fourteen commercial banks of Pakistan. Secondary data of economic indicators were also used to augment and verify the findings of the study. T test is applied to check the significance of the risk factors.The results of our study indicate that all four market risk factors namely GDP Growth Rate, Inflation Rate, Foreign Direct Investment and Interest Rate Volatility were found significant for the success or failure of consumer banking in Pakistan. Descriptive measure of mean was used for the ranking of market risk factor. Interest rate volatility is ranked the highest by the respondents, followed by Inflation, FDI and GDP growth rate. This study concludes that financial crisis have impacted on the consumer banking in Pakistan and market risk factors played significant role in this episode of crises. This study creates value for the policy makers of banking institutions to develop risk management framework in the context of consumer banking by considering contemporary changes in the economic factors.

Keywords: Risk Management, Market Risk, Financial Crisis 2008, Consumer Banking.